Sunday, April 27, 2008

Barack Obama Shines On Fox News Interview

Barack Obama did a wonderful job of presenting himself and his plans for America after he is elected president, to Chris Wallace on Fox News this morning.

He came across as articulate, genial, intelligent, caring and willing to work together with all people. He handled all of Chris Wallace's questions with ease. He showed how difficult it will be for John McCain to debate him on important policy issues, including the old saw that Democrats just want to "tax and spend".

Personally I think that "tax and spend" is better than just "spend" which is what we've been doing for the last 7 years; building up deficits.

In 2004 John McCain said, when asked about George Bush's tax plan, "I voted against the tax cuts because of the disproportional amount that went to the wealthiest Americans. I would clearly support not extending those tax cuts in order to help address the deficit." - however now that it is politically expedient he says he will keep those tax cuts in place.

When talking about the disparities in the Bush tax system recently Warren Buffett, who opposed the Bush tax tax plan was it was first proposed, said that his effective federal income tax rate is 17.7% while his receptionist is in the 30% bracket, and he doesn't think that's right.

You can't get something for nothing - we don't ask our government to provide social security, medical care, a military, repair our aging infrastructure, give people who would not otherwise have a chance at a higher education a chance with low interest loans and grants; without taxes. If you are a hard core Libertarian who thinks "the government's responsibilities should be limited to the protection of individual rights from the initiation of force and fraud", then vote for Ron Paul. We might not have schools, roads, or social security - but you get what you pay for.

Here's the straight skinny on the tax discussion -

Barack talked about his proposal to roll back the long term capital gains tax reductions that were put in place by George W. Bush. Returning the capital gains tax rate to what it was during the Reagan administration will not increase taxes for working class Americans because capital gains are not taxable in 401K plans.

Neither Obama or McCain are talking about increasing the short term capital gains tax. Short term capital gains are currently taxed at the same rate as income (25%) for what I'll call average Americans. A short term gain means you buy and sell a stock within a year, and make a profit. This has no impact on 401K plans, since the money you accrue in those accounts will be taxed at your regular income tax rate when you retire.

Long term capital gains are currently taxed at 15% for average Americans. That sounds pretty good since it's 10% less than the 25% rate that would apply if that capital gain was treated as income.

The real issue is that long term capital gains for individuals come in the form of dividends paid on stock you hold for more than a year, and dividends tend to be in the 4% annual range. Assume you happen to have $100,000 in a stock that pays a 4% dividend; you will have a $4,000 capital gain that would be taxed at 15%, and under Obama's plan might be taxed at 20% or maybe even gasp! 28% which is what they were under Ronald Reagan's, Tax Reform Act of 1986.

Lets do the arithmetic.

At 15% your tax bill will be 600 bucks, at 20% it's $800 and at 28% it's $1120.

So what Barack is talking about for this theoretical middle class American family making $65,000 to $135,000 a year is an extra 200 to 520 dollars in taxes per year....assuming they have been able to invest $100,000 in stocks outside of a 401K plan.

For the average working class American returning the long term capital gains tax to what it was during the Reagan years will not increase your taxes. The additional revenue will help reduce the budget deficits that will be passed on to our children, and ensure that the wealthiest Americans pay their fair share.

Assume you have $1,000,000 in stocks outside a 401K; then the tax bill on your 4% dividend goes from $6,000 today for the 15% case to $11,200 with the long term capital gains increase to 28%. You can see the point - as an individual you only care about the capital gains tax if you have a lot of capital gains; in the million(s) - for the vast majority of Americans this is obviously not the case.

The second point that they covered on taxes was Barack's plan to do away with the cap on the Social Security payroll tax.

For most of us - again this is a don't care - at least from the standpoint of higher taxes (they won't be higher). However it's a huge issue if we would like to have Social Security Benefits available when we retire.

According to the Social Security Administration, in 2008 the cap on social security payroll taxes applies for people with annual incomes above $102,000. If you make less than $102,000 you pay the full tax, anything you make above $102,000 is not subject to social security payroll taxes.

Warren Buffett knows something about economics and he agrees with Barack Obama on doing away with the social security payroll tax cap for people making over $102,000 a year. The option is to keep spending without taxing, running up big bills that we will leave for the next generation of Americans to deal with - and that just doesn't seem fair.